European Banking Monitor: Flashing Red
Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor". If you'd like to receive the work of the Financials team or request a trial please email .
Key Takeaways:
* Default probabilities rising globally. European sovereign CDS widened across the board last week. Similarly, nearly all European Bank credit default swaps widened last week. Italian and French banks saw their spreads widen by double digits WoW. Domestic bank CDS followed suit.
If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.
Matthew Hedrick
Senior Analyst
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European Financials CDS Monitor – Bank swaps were wider in Europe last week for 38 of the 39 reference entities we track. Notably, French banks widened dramatically. Societe Generale widened by 65 bps to 402 bps while Credit Agricole widened by 69 bps to 404 bps. The debt markets are casting their vote on the outcome of the French elections. Meanwhile, Italian bank swaps weren't far behind with increases of 48 to 97 bps week-over-week. Spanish banks were wider as well, though more modestly than their French or Italian counterparts.
We've also included a few Chinese banks for reference at the bottom of the table, and we will be soon rolling a table of Asian Financial CDS. The three Chinese banks we track showed week over week increases, but are generally trading in the low-200 bps range.
Euribor-OIS spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was roughly flat over last week, ending the week at 38 bps.
ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing more from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis. The latest overnight reading is €789.71B.
Security Market Program – For a tenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 5/18, to take the total program to €212 Billion.
